Wealth gap grows between races

Whites on average had six times the net worth of blacks and Hispanics in 2010

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Wealth disparities for middle-income blacks and Hispanics have worsened over the past three decades relative to white families, largely because of a lower likelihood of owning homes and retirement accounts, according to the Urban Institute.

New research from the Washington, D.C.-based nonprofit points to an extraordinary wealth inequality between the races. Whites on average had six times the net worth of blacks and Hispanics in 2010, or $6 for every $1 (an average of $632,000 vs. $103,000). Comparing the median that year, whites actually had eight times as much wealth.

PG graphic: Average family wealth(Click image for larger version)

Wealth or net worth is defined as a person's total assets -- such as bank and retirement accounts, and home value -- minus debt -- which includes mortgages, student loans and credit card balances.

The income gap, by comparison, is much smaller.

In 2010, the average income for whites was twice that of blacks and Hispanics ($89,000 vs. $46,000), meaning that for every $2 whites earned, blacks and Hispanics earned $1.

"What we see looking at wealth disparities is that African-Americans and Latinos are not on the same wealth-building trajectory as white families," said Caroline Ratcliffe, a senior fellow at the Urban Institute and co-author of the report. "They are less likely to own homes and retirement accounts, so they miss out on these traditionally powerful wealth-building tools."

The report found the racial gap grows sharply with age. Early in wealth-building years (when adults are 32 to 40), white families have on average 3.5 to 4 times that of families of color -- $184,000. But by the peak years (ages 59 to 67) that had skyrocketed up to $1.1 million -- seven times more than blacks and nearly five times more than Hispanics.

The Urban Institute's report, "Less than Equal: Racial Disparities in Wealth Accumulation," was funded by the Ford Foundation, the Russell Sage Foundation and the Annie E. Casey Foundation. The researchers reached their conclusions using data from the 1983 to 2010 editions of the Federal Reserve Board's Survey of Consumer Finances.

Jim Carr, a senior fellow at the Center for American Progress in New York, said the report reinforces several recent studies from other organizations, such as the Pew Research Center, showing the racial wealth gap continues to grow wider.

He sees the housing market as a key factor.

"The disproportionate loss of homeownership among people of color is the largest contributor to the startling increase in wealth disparity," Mr. Carr said. "Severely depressed home prices are another contributor. To the extent home prices recover, families that have managed to hold on to their homes will also begin to recover their lost wealth."

But, he said, the racial wealth gap overall may grow further since so many families of color lost their homes.

"Proposals to rebuild the housing finance system going forward must better serve people of color," Mr. Carr said. "In particular, our rebuilt housing system must support the leveraging of current historic low mortgage rates and significantly depressed home prices to enable people of color to become homeowners."

He said most proposals now being considered do not address either promoting affordable homeownership or the need to serve borrowers of color.

"In fact, most proposals to restructure or replace Fannie Mae and Freddie Mac acknowledge the inadequacy of those recommendations to promote affordable homeownership and suggest that goal should be solely the role of [the Federal Housing Administration]."

The Great Recession from 2007 to 2009 didn't cause the wealth disparities, but it did magnify them. White, black and Hispanic families all experienced sharp declines, but Hispanics experienced the largest (40 percent) due to lower home values. Black family wealth was hit hardest by falling retirement account balances (31 percent decline). The wealth of white families fell 11 percent, according to the report.

A lot of Hispanic families bought homes just before the recession with higher debt-to-asset values. They started with higher debt-to-asset values, and the steep decline in housing prices meant an even steeper decline in their wealth. This meant they were more likely to end up underwater or with negative home equity. Between 2007 and 2010, Hispanics saw their home equity cut in half, compared with about a quarter for black and white families.

Black families were more likely to withdraw money from their retirement savings after a job loss or some other adverse event, which led to larger declines in retirement savings.

"Wealth isn't just money in the bank. It's insurance against tough times, tuition to get a better education and a better job, savings to retire on and springboard into the middle class. In short, wealth translates into opportunity," wrote Ms. Ratcliffe and co-authors Signe-Mary McKernan, Eugene Steuerle and Sisi Zhang in the Urban Institute report.

Ms. Ratcliffe said it's the automatic process of saving that helps people build wealth over time. As they pay off a mortgage, they build equity even if home values decline. Automatic payroll deduction for company retirement plans is another form of passive saving.

"We know wealth is passed from generation to generation, and we know that African-American and Hispanic families are about five times less likely than whites to inherit money and, when they do, they inherit less. These things contribute to the wealth gap and have a ripple effect on one generation to the next."